MORGAN STANLEY: A 'Goldilocks' Brexit could save the British economy from disaster

Economists at Morgan Stanley argue that if the British government
manages to secure a so-called "Goldilocks Brexit," which manages
to satisfy all parties, the UK's economy could avoid any
substantial damage from leaving the European Union.

Writing in a note entitled "Spending Until Squeezed" on Thursday,
Morgan Stanley's UK economics team argue that while the most
likely economic outcome of Britain leaving the EU will be a
gradual slowdown over the coming years, a just-right deal could
mean no ill effects to UK PLC.

This sort of deal may be unlikely, but it is possible, the pair
argue, saying: "There is a chance that the UK consumer will
continue to purchase at a similar pace for an extended period.
The Brexit-related headwinds may be much weaker than we expect —
although this would likely require the unfolding of an
unexpectedly gentle Brexit."

There are four key areas where Nell and Baker see as potentially
influencing the robustness of Britain's economy once the Brexit
ball is rolling.

"First and foremost," they write "job losses may be much
milder/drawn out than even in our modest central case. Actual
Brexit is more than two years away, potentially delaying most of
any structural change that could bring job losses in some
sectors. The impact of the weaker currency on inflation may be
weaker than we anticipate. That would leave several tailwinds
dominant and help to keep consumer spending growth elevated."

Next up, is how growth in wages progresses as Brexit talks start.
Here are Nell and Baker once again:

"We see upside risks to our pay growth forecast for several
reasons: 1) The National Living Wage is set to rise another 4.2%
in April.2) With the UK close to full employment workers may
demand (and be granted)higher pay growth than in our central case
to compensate for higher inflation.3) We could see a sharp fall
in net migration (e.g.as a result of the weak GBP, perceptions of
a more hostile UK and improving labour market conditions in the
rest of the EU), tightening the UK labour market further."

It is worth noting, as Morgan Stanley does, that if wage growth
does continue strongly it could force the Bank of England to
increase interest rates to stop the economy overheating. This
would have impacts on "some of the positive effects for aggregate
consumer spending."

"That suggests significant scope for households to save money on
their grocery shopping at least (especially given that, since the
last big batch of currency depreciation in 2008, the number of
Aldi/Lidl stores has risen by ~59%. The chances of having an Aldi
or Lidl close by are substantially higher now). There is also
room for shoppers to 'trade down' within store, e.g. moving to
cheaper ranges for part of their shop."

They do not suggest that this will definitely occur, but if it
does, "consumer spending can hold up well in volume terms despite
higher inflation."